Measuring of OEM Software Procurement – A Case Study

1. Measuring of OEM Software Procurement – A Case Study Petri Ruotsalainen Supervisor: Professor Heikki Hämmäinen Instructor: M.Sc. (Tech.), LL.M. Simon Indola

2. Content • Why this study • Study • Study questions • Procurement • Supply chain management (SCM) • Measuring • Balanced Scorecard • OEM software • Case • Case companies • Measures • Conclusions • Further research

3. Why this topic • I was working for Global SW procurement for previous summer and had opportunity for thesis work. • The role of procurement has increased in resent years. Approximately 60% to 80% of organization expenses come trough procurement, there exists great potential for organization profitability increase. • Software is complex item to make business with as: • the fixed costs are close to zero, and • there is no one right price for software product. • OEM software has it own characteristics as: • it is part of company own product, • it has supply chain focus, and • It might have high transition costs.

4. Study • I came up with this study topic by my self after few months of planning • As the topic was quite unique by nature I choose to make a case study • After defining the study questions, I planned to have better focus on theory, to be able to make some recommendations according the case. • In the beginning I interviewed 7 colleagues to get view of professionals into this topic. • After colleague interviews I also had for a moment thoughts of taking the supplier view in to the study. • I created a company survey to be a base for the case study. • I contacted 14 potential companies from which: • 4 I get an interview • 2 companies from machine industry did not have OEM software in their products • 4 did not have process for OEM software procurement • 4 companies refused to answer the study • Questions were emailed before hand and the actual interview according to survey was carried out face to face.

5. Study questions Study question on the OEM software procurement: • How should it be measured? • How is it measured and the reasoning behind it? • How could the measurement of it be improved by using the theory and frameworks from the literature?

6. Procurement role • Porter value chain: Procurement is part of support activities in value chain

7. Procurement terms • A. Van Weele the terms

8. Supply Chain Management (SCM) • SCM has very broad meaning, it consist the whole chain from raw materials to supplier and supply base management, all the way trough the procurement, production, sales and delivery chain to the customer. • Procurement as any other subsection of supply chain might have negative effect on supply chain, when it optimizes too aggressively only its own activities. In the long run it is about total performance of supply chain co-operation, not rival competition of separate supply chain subsections.

9. Measuring 1/4 • “You get what you measure”. • “If you can’t measure, you can’t control it, if you can’t control it you can’t manage/lead it”. • “Everything what is measured improves”, you should be aware that your measures do not sub optimize and that they can’t be fooled.

10. Measuring 2/4 • Measuring derives from performance management and performance measurement. • Measures should be in line with the strategy. • Traditional measuring has been based on financial measures, which drive to short term focus and lagging information (the information is about the history).

11. Measuring 3/4 • To get over the problems of traditional measures there are multiple measuring frameworks available • Financial based like: • Economic Value Added • Activity Based Costing • Or broader measuring systems like • Balanced Scorecard • Performance prism • Performance Pyramid • Tableau de Bord • ProMes system • On supply chain management there are used structured techniques for complex decision making to determine the right kind of measures.

12. Measuring 4/4 • The balanced focus is important it means balance between • Lead and lag • Effectiveness and efficiency • Financial and non-financial • Tangible and intangible • Balanced Scorecard is good example of balanced focus

13. Balanced Scorecard (BSC) • The BSC is balanced performance management tool, in which measuring is in key role. • Measures are created from the strategy by using strategy map. • BSC has four main areas of measuring: • Financial • Internal processes • Customer • Learning and growth

14. BSC and procurement • BSC is made to manage and measure on the company level, not directly some specific sub processes as procurement. • BSC can be implemented from down to up or up to down in organization hierarchy. • In some studies there have been propositions, to modify BSC to fulfill better the procurement needs, by adding extra supplier measurement area.

15. OEM Software • OEM (Original Equipment Manufacturer) software is third party software product which is implemented as a component in to company product. • OEM SW is used in large automated systems as well as in small devices, also operating systems have usually OEM SW. • Financial measures fit poorly on measuring of procurement as only measures as • the financial measures are lagging and • measurable realization of hard work done in strategic part of procurement, depends on the license orders made if any. • There are no absolute values to compare the financial achievements to, as software products do not have one right way to evaluate in monetary.

16. Case: Company questions • How is the field measured? • How well the meters are aligned to strategy? • How well the measures are balanced? • What are the performance indicators that are found most valuable?

17. Case companies • There were four companies to take apart to my interview: • 3 ITC companies • 1 industrial goods and services • As my questions were related on strategy, internal processes and some monetary categorizations, I promised to present the companies involved anonymously, otherwise I would not have gotten any interviews.

18. Case companies on more detail • Revenue over 500M€ • Of average ~500 procurement employees, on the average 15 worked for OEM SW procurement • The number of OEM SW suppliers range from min 5 to 20 two companies with max 100-500 • OEM spend is under 20% of total product related SW spend in all companies • On the average 85% of company products have OEM SW

19. Case companies (one/ color) SW and OEM SW in Kraljic matrix

20. Case companies according to Weele’s model • Companies reside between 2 & 6, 4 on the avg.

21. Case: Measures 1/3 • According to BSC with added supplier aspect the measures found to deploy it quite evenly. • If excluding company B with measures and organization on the plan level, half of the measures were financial based. • Only half of measures were directly related on strategy

22. Case: Measures 2/3 • Companies own most valuable measures: • financial • cost of development licenses • cost for competence development • TCO savings (procurement spend running cost -> savings calculations) • product cost • customer • FFR (field failure rate) • internal process • Agreement info accuracy in the system • learning and growth • ability balance • development discussion

23. Case: Measures 3/3 • Companies own least valuable measures: • finance • savings • fixed production overhead FPO • In the scale 1(=poor) to 5(exelent) the case companies evaluated their measuring, resulting average over three from the organization and procurement level and 1,6 from the OEM SW level • Two of companies were developing measures on OEM SW level as two were quite ok with poor measures.

24. Conclusions • The case companies had relatively few measures on this particular area. • The few number might result little on the fast phase of interview, as some measures might not com into mind right away. Interviewees were not responsible of most measures as the were managed higher above in the organization. • The OEM software procurement seem to lack strategy although: • it was said to be the main driver of work, and • Measuring should be based on it. • Traditional financial measures by them selves do not fit on procurement especially OEM SW (lagging and random vision). • Measuring should have supply chain and balanced focus. • Measures should be in line with the strategy. • Managing of measures should be regular.

25. Further research • Is it more convenient to use some other management system than measuring, in complex business environments? • What is the most convenient measurement system in small business functions? Should the processes or job descriptions be the guide? • Does the number of employees affect much on profitability of measurement system? What is the minimum number of employees required, when it is still profitable to create detailed measurement system from the scratch?

26. Thank you! Questions?